Wednesday, August 2, 2017

So what does GNI* tell us about the Irish NFC sector?

A fortnight ago the CSO started the process of publishing adjusted national accounts which are intended to give a better view of developments in the Irish economy as those produced using the internationally-agreed standards become even more distorted by the activities of MNCs operating here. 

The new measures published (as well as the publication of previously suppressed figures) is undoubtedly a step in the right direction but there was some disquiet that the adjusted measure of national income, GNI*, recorded nominal growth of 9.4 per cent in 2016.  With deflators close to zero this implies a real growth rate also around nine per cent which does seem a little high.

Today, we get some insight into that growth figure with the publication of the Institutional Sector Accounts consistent with the figures in the National Income and Expenditure Accounts.  Here is the sectoral breakdown of GNI* for each year since 2010.

GNI star by sector

The overall growth of GNI* of 9.4 per cent can be seen and we can now see the sectors this arose in.  The growth of GNI for the households and government sectors of five per cent seems about right while the financial sector records a small drop the sector itself makes up a small proportion of the total and can be volatile.  The standout figure is the 22.5 per cent increase in the adjusted GNI of the non-financial corporate sector.

The adjusted NFC measure accounts for the net income of redomiciled PLCs and the depreciation of foreign-owned aircraft for leasing and intangible assets.  The NFC sector is the only sector to which adjustments are made.  The recent growth in the adjusted GNI for the NFC sector is remarkable.  It was €18.4 billion in 2011 and rose to €55.2 billion last year – an increase of 200 per cent.  So let’s dig a little deeper in the NFC sector. 

Here is the current account of the NFC sector since 2011.

NFC Sector Accounts 2010-2016

Is it possible to see how the 200 per cent rise over the past five years in GNI* for NFCs has come about? Not especially.  But we can see what is not in the €55 billion figure for 2016.

Starting with the €188 billion figure of GDP, or Gross Value Added, of the NFC sector in Ireland we see that:

  • €51.3 billion went on the compensation of employees, an increase of seven per cent on 2015.
  • around €49 billion accrued to other sectors through dividends paid or retained earnings owed with most of this likely to foreign direct investors in the rest of the world sector.
  • we need to add €14 billion for dividends received and retained earnings owed to entities in the Irish NFC sector from the rest of the world
  • and subtract the €6.5 billion of interest paid (after the FISIM adjustment)
  • and subtract the €5.8 billion of net income (dividends and retained earnings) which accrued to redomiciled PLCs from the rest of the world
  • and finally subtract the €33.8 billion of gross value added consumed by the depreciation of aircraft for leasing and foreign-owned intangible assets.

So, the increase is not the net profits of foreign direct investors, the gross profits from the aircraft or intangible assets that foreign-owned companies have located here, the net income of redomiciled PLCs.  Back in April we wondered if the Irish business sector is doing better than we think and maybe it is but the GNI* figures suggest it is doing remarkably well.  Here is adjusted GNI for the NFC sector for the entire time series available:


Hmmm. Celtic Tiger how are ya?  The adjusted and unadjusted measures are shown here.  Between 1999 and 2006 GNI* for NFCs grew by 128 per cent (the unadjusted measure grew 144 per cent). Pretty impressive.  Between 2009 and 2016 the same measure grew by 308 per cent (with 444 per cent growth in the unadjusted measure). 

There is no doubt the steps taken by the CSO are getting us closer to what is happening in the Irish economy but do we really believe the Gross National Income of Irish business sector is more than twice what it was at the peak of the bubble? It could be that there is still something in GNI* (and also the current account) that means we haven’t quite yet reached our destination.

What could it be?  Impossible to say.  Is there an issue with the treatment of redomiciled PLCs?  The adjustment takes a Balance of Payments approach but what about the profits these companies earn in Ireland?  For most foreign-owned companies these would be recorded as a factor outflow in the Balance of Payments but for companies that are Irish-headquartered their Irish-source profits are not counted as a outflow unless they are actually paid out to foreign shareholders as a dividend.  It is hard to know if this is even a significant factor. 

What else could it be? Foreign profits of Irish MNCs?  Is there anything to indicate that they are doing remarkably well outside of Ireland?  Maybe it's profit shifting but that would have offsetting effects on GNI (domestic valued added down, foreign income up).  Any other suggestions?

It must be remembered that what we have so far is just the first step.  If we look at the CSO response to the report of the ESRG we note that they say:

  • The CSO proposes to include in the annual Institutional Sector Accounts (ISA) publication a breakdown of the non-financial corporations (NFC) sector into two broadly-defined, foreign and domestic, sub-sectors. The NFC sector accounts for 5 most of the multinational enterprises (MNEs) operating in Ireland. Initially, the breakdown will be between the companies covered by the CSO’s Large Cases Unit, i.e. the largest and most complex MNEs, and the remainder.
  • This initial work is scheduled for publication at the time of the annual sector accounts results in October 2017, following which the CSO will investigate extending this analysis to a quarterly basis.
  • The breakdown by Large Cases firms and the remainder in the sector accounts is an initial step; during 2018, we will develop the basis for the breakdown by ownership into MNE and other sectors and we will review other possibilities such as the feasibility of implementing this foreign / domestic split in other presentations of the national accounts data.
  • In addition, we will explore the data classifications proposed in the FitzGerald (2016) and Honohan (2016) papers.
  • The publication of Table 1 of the QNA in current prices is a longer term project; it is dependent upon the work already underway on the calculation of an output-based annual estimate of GDP to complement the existing income and expenditure measures. The schedule for this work extends into 2018.

If we had the NFC table above on a foreign firms (including redomiciled) / domestic firms basis it would really shine a light on what is going on. Hopefully.

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